A question I am often asked by potential buyers is “How much cash do I need to buy a house”?
While mortgages now usually require at least a 3% down payment, there are down payment assistance programs available so you may still be able to end up financing your entire purchase price. Your lender will help you determine the best financing program for your situation and provide you with a Good Faith Estimate of how much cash you will need at closing.
Even with zero down financing, however, you will need some cash at various stages of the buying process prior to closing.
Earnest Money – When you make your offer to buy a home you will include an earnest money deposit with your offer, usually in the amount of about 1% of the purchase price (i.e. $2,000 earnest money for a $200,000 purchase). This money will be held in the escrow account of the listing broker until closing, when it will be applied towards the cash you need to close. Depending on your financing, you may even get some of this money back at closing.
Home Inspection – You have the option of making your purchase subject to a private home inspection, usually done within 3-5 days after coming to an agreement. If you use a professional inspector, budget about $300-$400 to be paid at the time of the inspection.
Appraisal – As part of your loan underwriting process, your mortgage company will order a professional appraisal to verify that its value is at least what you are paying for the property. Budget about $325-$425, usually payable prior to the appraisal.
Homeowner’s Insurance – You must have a binder for first year of homeowner’s insurance when you close. This is usually paid prior to closing, but is sometimes paid as part of your closing costs. Budget approximately 0.02%-0.03% of the purchase price for this expense if you are purchasing a house. (If you are purchasing a townhome or condo, it is usually included in your association fee.) Typically your monthly mortgage payments will include an amount to be escrowed for future insurance payments to be made on your behalf by your mortgage company.
Down Payment – Your down payment (usually 3% – 20% of your purchase price) is due at closing, which is usually 4-6 weeks after coming to an agreement. Your earnest money can be applied to this amount, as can down payment assistance.
Closing Costs & Prepaids – Most of your closing costs are associated with your financing and title transfer, and your lender will provide you with a detailed Good Faith Estimate. Total costs are usually about 3.5% – 4% of your mortgage amount. Buyers short on cash often finance most of their closing costs as a seller contribution of up to 3% of the purchase price as part of the purchase agreement.
This is just an overview estimate of typical cash requirements for buying a home and actual costs will vary. Consult with your lender and Realtor for estimates based on your unique situation.
